Broker Check

The Swiss Franc – a 30% Increase!

| February 05, 2015

The biggest news of the week was the sharp increase in the Swiss Franc (Switzerland’s national currency, abbreviated CHF). The CHF had been pegged to the Euro since 2011 until last week when this was ended in a surprise move by the Swiss National Bank. The Swiss, having a more stable economy than the European Union, had to be artificially kept at the peg of 1.2 CHF to the Euro. The ending of the peg was prompted because the Swiss central bank’s balance sheet had effectively quintupled in size because of the constant intervention necessary to control the CHF. The Swiss were trying to keep their currency low so vacationers would still come and foreign countries would continue to buy Swiss products. This is classis economic education 101. It always seems like the market wins when man tries to control it!

The ramifications of this are still to be determined but Swiss ski resorts are already cutting prices and the country’s tourism board is suggested cuts in prices across the board to keep people coming. Swiss exports will likely fall as the cost to buy their products has dramatically increased. An increase of 30% in a currency, especially one with such a strong economy backing it as Switzerland is unheard of in modern economics. Many day traders and even institutional traders have probably been wiped out and even worse as a result of this move. Across Europe and the world, corporations, wealth individuals and regular working class people were all borrowing in francs because of the low interest rates. Now those low rates have become 30% larger liabilities. Not a good thing for them.

Interest Rates – Where are they headed… and when?

Interest rates of 10 year US Treasuries were 1.83% as of Friday, up from 1.75% earlier in the week. Compare this, oddly, to a much weaker Eurozone economy (as many would agree), where rates are 0.411% (Germany), 0.635%, 1.5% (Spain), 1.659% (Italy). As far as future US rates are concerned, the consensus among US Federal Reserve watchers for a mid-year rate hike is being questioned. Other consensus is showing rates not increasing into October or even later. Some, like Bill Gross, formerly of PIMCO are suggesting they will not rise this year at all – or for the next five years! This makes sense because the economy is generally seen as still not improving, while oil and other commodities have dropped sharply. Some think we are headed for deflation. The 2 year federal funds rate dropped to 0.47% last week from 0.75% a month earlier. The question is when will rates rise? It is appearing more and more likely it might not be this year at all.

Market Highs – How long can they last?

Investing is easier when the market is lower (if you can stomach it – most can’t) but when there are continual highs in the face of some warning signs it does give us some worry. Just because the market is at a high is no reason not to invest – the market has always been making higher highs and will continue to do so (of course, it will also correct). There are some indications that the market is more highly valued now than at any time since the end of World War II. Of course, other signs are showing its not nearly as high as it was during the 2000’s tech bubble. Add in US retail sales falling by 0.9% in December in the face of falling oil… and people begin to worry. High equity prices without a lot of euphoria are something new. This time it’s not different, it’s just hard to find just what time this is we are repeating.

Seeking Interest – It is there if you can find it.

OK! Things are bad, they might get worse, and they might get better. My bank pays me 0.01% interest so I am losing 1.7% per year to inflation. Where can I make money!??!? It is always a compelling question to ask and a difficult one to answer. There are bright spots where money can be made today, with risk, but without too much risk. You just have to look in the right places…

A note about the report:

I have, for as long as I can remember, been fascinated by the economy and the stock markets. I have, for nearly my whole life, been trying to interpret both. I even have my Bachelor of Arts in Economics, though the School of Hard Knocks has been a better teacher. In putting pen to paper I hope to inform others about where I see the economy and the market, and perhaps even where they are headed. This is not financial advice. Proceed with caution and enjoy.

Our Source Material:

Barron’s Vol. XCV No. 4 - January 19, 2015

The Wall Street Journal - January 19, 2015